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Value Thoughts - Lawson Products, Inc.

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Lawson Products, Inc. (Nasdaq: LAWS), is a North American distributor of products and services to the industrial, commercial, institutional, and governmental maintenance, repair and operations marketplace.

The company also manufactures and distributes production and specialized component parts to the original equipment marketplace including the aerospace, off-road equipment, military, and oil and gas exploration industries.

During 2010, the company discontinued operations of two of its subsidiaries, Assembly Component Systems, Inc. (ACS) and Rutland Tool & Supply Company (Rutland).

The company was incorporated in Illinois in 1952, and re-incorporated in Delaware in 1982.

The stock closed recently at $18.67, with First Resistance at $19.51, a 4% increase from the recent close, and Second Resistance at $21.51, 15% increase from the recent close. Should the stock price push through Second Resistance, the next point of resistance is $27.21, a 46% increase from the recent close.

Negatively, First Support for the stock price is currently at $13.41, a 28% decline from the recent close.

The 13-week Relative Strength number is 20, with the stock price trending downward. However, the daily Relative Strength number is near 40 and seems to be indicating a slight upward bounce in the stock price. The upward shift could keep the stock price out of over sold territory for the immediate future.

Quarterly earnings, announced 07/28/2011, were $0.12 per share, an $0.08 decline from the same year over year period.

Earnings Growth Valuation

Earnings growth valuations are based on the spread between year over year earnings growth and the current PE.

In the case of Lawson Products, Inc., the company had year over year earnings growth of 150%, ending FY10 with earnings of $1.18 per share.

With a trailing twelve month PE currently at 16, the spread between earnings growth and the PE is 10, meaning that for an investor focusing strictly on earnings growth, the stock should be trading at $29.22, an $11.25 increase from the recent close.

Fundamental Investment Valuation

Liquidity: The company ended FY10 with a Current Ratio of 2.43, a Quick Ratio of 1.49, a Cash Ratio of 0.73, and a Cash Conversion Cycle of 140 days. In addition, Goodwill and Intangibles comprised slightly less than 12% of Total Assets. When adjusted to compensate for these items, the company's Book Value of $16.81, drops to $13.48.

Profitability: FY10 found the company with a Gross Margin of 63.5%, an Operating Margin of 5.4%, a Net Operation Margin After Taxes (NOPAT) of 3.16%, a Return On Invested Capital (ROIC) of 8.77%, and an Effective Tax rate of 42.5%.

Debt: The company ended FY10 with no Debt.

Cash Flow: The company's FY10 Operating Cash Flow was $1.96 per share, a year over year decrease of 16%. The company also ended FY10 with Free Cash Flow of $0.53 per share, a year over year decrease of 69%.

Dividends: The company paid dividends of $0.26 per share during FY10, a year over year decline of $0.06 per share.

Fundamental Valuation: Based on our review of the company's latest annual financial information we think a Reasonable Value Estimate for the company is in the $34-$40 range.

Our Thoughts

Needless to say, the company is not in one of the glamor industries, and while we agree that selling nuts and bolts may be a bit boring, we also recognize that without nuts and bolts, little, if anything, is going to be manufactured or assembled.

But selling nuts and bolts does have it's perils. In August 2008, the company entered into a Deferred Prosecution Agreement (DPA) with the U.S. Attorney’s Office in connection with representatives of the company improperly providing gifts or awards to purchasing agents through the company’s customer loyalty programs.

Pursuant to the DPA, the company agreed to a $30.0 million penalty. The company paid $10.0 million in 2010, 2009, and 2008 in accordance with this agreement and continues to comply with the terms of the DPA which expires in August 2011.

In addition, during 2009, the company identified that it had shipped a limited number of products in violation of certain state environmental regulations and reported its findings to appropriate regulatory agencies. The company also recalled a limited number of products and is working with state regulators to take appropriate remedial actions to comply with these environmental regulations.

As of December 31, 2010, the company has accrued $0.2 million for penalties and expenses related to environmental matters and at this time, the company cannot determine if any further expenses may be incurred.

Portfolio Thoughts

Considering a Recent Close of $18.67, an estimated Merger and Acquisition payback of 6.7 years (assuming EBITDA remains the same), year over year earnings growth of 150%, year over year free cash flow growth of (69%), and our reasonable value estimate of $34-$40, we believe that on a fundamental investment basis the stock is currently UNDER PRICED, and a candidate for additional research for the Wax Ink Portfolio.

Wax

Disclaimer

We have no position in Lawson Products, Inc. and no plans to initiate a position in the next 5 business days. Additionally, we have received no compensation to write about a specific stock, sector, or theme.